Vegas Boom Sees No End

The normal laws of supply and demand don't appear to apply in Las Vegas.

One might expect the opening of new casinos and hotel expansions to dent overall occupancy or pull visitors away from existing properties. But in Las Vegas, flashy new projects tend to boost demand elsewhere, as visitors curious to see the latest entrant stroll down the street and into other casinos.

The next test of this phenomenon comes on April 28, when Wynn Resorts ( WYNN) plans to open its ultra-luxurious Wynn Las Vegas resort, adding more than 2,500 new rooms to the Las Vegas Strip.

The resort is the latest project of casino impresario Steve Wynn -- renowned for developing the Mirage and the Bellagio -- and is expected to draw lots of high rollers.

So far, demand at Wynn looks strong, according to Goldman Sachs analyst Steven Kent, who met with Wynn management on a recent Las Vegas trip. Wynn Las Vegas has already booked 60% to 70% of its convention rooms for this year, while 2006 bookings are "ahead of schedule," Kent wrote in a research note. The analyst's own research suggests standard room reservations are going for about $300 a night, well above the company's original budget for around $200. (Goldman Sachs does and seeks to do business with companies covered in its research reports.)

Wynn Resorts did not respond to interview requests in time for this story.

One might expect other companies to be quaking in the face of a slick new resort. Instead, they're voicing optimism.

"Las Vegas thrives because of competition, not in spite of it," said Alan Feldman, spokesman for MGM Mirage ( MGG), which expects to soon wrap up its $7.9 billion acquisition of Mandalay Resort Group ( MBG). "Every time someone brings something really new into this marketplace, the market grows. When people come to Vegas, they're not isolated in one casino or one hotel. They come and here's this enormous a la carte menu of things to do," Feldman said.

"Whenever Wynn opens a new property, it does increase demand for visitation," said Gary Thompson, a spokesman at Harrah's Entertainment ( HET), which is in the process of acquiring Caesars Entertainment ( CZR) in a deal that will create the world's biggest casino company.

But a new supply of hotel rooms by itself is not enough, said Feldman and Thompson. The additions must be of high quality and come with new attractions. History reveals just slapping up a new hotel tower without new restaurants, retail shops or shows doesn't always boost demand.

Feldman said the Luxor, a Mandalay resort, roughly doubled its rooms in the 1990s but failed to offer significant new attractions, with initially disappointing results. "If the lesson hadn't been learned by then, it was absolutely learned at that moment," he said. "This is not about inventory. It's about attractions."

A more recent example suggests fresh supply is being gobbled up without hurting occupancy or room rates.

MGM Mirage's Bellagio opened its 928-room Spa Tower in late December, increasing the Bellagio's capacity by roughly 30%. Even so, occupancy for the entire resort has risen, Feldman said.

The company won't comment about the effect on room rates. But a weekly survey of Las Vegas room rates by Merrill Lynch analysts suggests they have remained firm, despite the expansion.

Midweek rates at the Bellagio have increased 7% on average from a year before, while weekend rates are up 34% year over year in the two months since the Spa Tower opened, Merrill analyst David Anders wrote in a research note. (Merrill Lynch does and seeks to do business with companies covered in its research reports.)

"We find it very encouraging that large assets can increase by 30% with no diminution in pricing," wrote Merrill's Anders.

MGM Mirage's Feldman pointed out that the Spa Tower came with plenty of attractions, including an elaborate spa, the Sensi restaurant and expanded convention space that will allow it to host larger group events.

Casino companies are enjoying a heady boom in Las Vegas. Visits and convention attendance continue to increase, and the local economy is growing briskly, driven in part by an influx of new residents.

The number of rooms in the city grew by 1,021, or 0.8%, last year, according to the LVCVA. Wynn's grand opening will obviously bring a much greater increase this year.

But observers said with the casino business doing well, Las Vegas has a long way to go before it overbuilds.

"You see these great occupancy rates of 90-plus percent," said Matt Quinn, senior lodging and gaming analyst at Zack's Investment Research. "As long as rates are outstanding, there's a compelling reason why they should be building more capacity." (Zack's neither does nor seeks to do business with companies it covers, and Quinn owns no shares of companies he covers.)